Does austerity pay off?

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To access the full text documents, please follow this link: http://hdl.handle.net/10230/26191

dc.contributor.author	Born, Benjamin
dc.contributor.author	Müller, Gernot J.
dc.contributor.author	Pfeifer, Johannes
dc.date	2016-04-27
dc.identifier.uri	http://hdl.handle.net/10230/26191
dc.format	application/pdf
dc.language.iso	eng
dc.relation	Ademu Working Papers Series;4
dc.relation	info:eu-repo/grantAgreement/EC/H2020/649396
dc.rights	This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
dc.rights	https://creativecommons.org/licenses/by/4.0/
dc.rights	info:eu-repo/semantics/openAccess
dc.subject	Fiscal policy
dc.subject	Austerity
dc.subject	Sovereign risk
dc.subject	Default premium
dc.subject	Local projections
dc.subject	Panel VAR
dc.subject	Fiscal stress
dc.title	Does austerity pay off?
dc.type	info:eu-repo/semantics/workingPaper
dc.description.abstract	We investigate if a reduction of government consumption lowers the sovereign default premium. For this purpose we build a new data set for 38 emerging and developed economies. Results vary along three dimensions. First, the time horizon: the premium declines, but only in the long run. Second, initial conditions: the premium increases in the short run, but only if it is already high. Third, size: the short-run response of the premium increases disproportionately as government consumption is reduced. We rationalize these findings in a structural model of optimal sovereign default where default risk is priced in an actuarially fair manner.

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